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What's all the fuss about Bitcoin?

Unless you’ve been living under a rock for the past 12 months, you’ve no doubt heard about Bitcoin. Once solely the realm of nerds, hackers and libertarians, Bitcoin’s stellar performance in 2017 has begun to attract widespread interest from the traditional finance sector. Due to popular demand, FP Markets has recently added the BTCUSD contract to our already extensive CFD offering. This article is intended as a quick primer on Bitcoin, as well as an explanation of the differences between trading “physical” Bitcoin and Bitcoin CFDs.

BTCUSD Jan 2017 – Nov 2017: Bitcoin’s jaw-dropping 1000% rally

So what is Bitcoin?

Bitcoin is a decentralized “cryptocurrency” intended as a store of wealth and a means of carrying out transactions and payments online. Unlike traditional fiat currency, which is persistently inflationary and issued by a central authority (governments and reserve banks), the Bitcoin supply is limited to just 21 million units and is issued and maintained by a network of computers. Bitcoin is minted through a process called mining, where users lend their computing power to the Bitcoin network and are rewarded coins for verifying processing and recording transactions. Once a transaction is recorded on the “blockchain” it is immutable, irreversible, this makes it attractive to web sellers in industries prone to consumer fraud and credit card chargebacks.

Issues with buying, storing and trading “physical” Bitcoin

Though Bitcoin and cryptocurrency is now more than 6 years old, the industry still faces a lot of issues. Purchasing Bitcoin with fiat currency has long been a very difficult and expensive process and very little progress has been made on this front. Due to regulatory uncertainty and Bitcoin’s disruptive, competitive nature, Bitcoin startups and firms have had a hard time building relationships with traditional banking institutions. If you were a bank, would you be looking to make life easy for an industry whose stated aim is replacing you?
Another issue with ‘physical’ Bitcoin is the fact that it isn’t really a physical object you can hold, Bitcoin is just data stored on computers. Now one could argue that the vast majority of traditional currency only exists on computers as well, but the difference is, if a hacker breaks into your bank account, your bank will generally make you whole again. As the Bitcoin network is centralized, there is no one to complain to or refund you if you are the victim of theft. Over the years there have been a large number of security breaches and thefts at major Bitcoin exchanges, with customers losing millions of dollars and generally having very little avenue of recourse.
In 2017, Bitcoin has also become quite costly to transact with; though it is still exponentially cheaper and quicker than an international wire transfer, transactions now generally cost around $5 USD per piece and take at least 30 minutes to confirm.

Advantages of trading Bitcoin CFDs

Unlike Bitcoin start-ups, forex and CFD brokers have long standing existing relationships with the banking sector. Forex and CFD brokers generally have a wide range of instant, fee-free deposit and withdrawal options, meaning you can fund your account and take a position in the Bitcoin market in a matter of seconds. CFDs also let you exit positions at the drop of a hat, if you hold physical Bitcoin and the market begins to crash, you will have exposure for as long as it takes you to withdraw and sell your Bitcoin for fiat currency.

Another advantage stems from the fact your CFD broker doesn’t deal in “physical” bitcoin. As such, the risk of theft is almost non-existent when compared to exchanges who actually store, buy and sell Bitcoin and other crypto-currencies. If your broker’s segregated accounts with their banking partners were somehow compromised by thieves or hackers, you would no doubt be made whole again.

CFD brokers also generally allow easy and cheap access to leverage, allowing you to take larger positions in the BItcoin market with the same initial investment. Though leverage is available at some Bitcoin exchanges, it is generally provided through internal peer-to-peer lending markets and can be very expensive when compared to CFD rollover costs. When Bitcoin is rallying, USD lending rates tend to increase dramatically and you can pay upwards of 30% per year just to finance your long position.

Bitcoin CFDs take the hassle out of trading Bitcoin and allow you to focus on trading.

Summary

Bitcoin’s is a decentralized “cryptocurrency” intended as a means of storing wealth and transacting online

Unlike traditional fiat currency, Bitcoin is issued and maintained by a network of computers, not a central issuing authority

Bitcoin’s amazing performance in 2017 is starting to attract widespread attention from the traditional finance sector

Bitcoin has become quite expensive to transact with and Bitcoin holdings are favoured targets of hackers and e-thieves

Bitcoin CFDs take the hassle and theft risk out of Bitcoin trading and make the market readily accessible to your average trader and investor

DISCLAIMER: This material on this website is intended for illustrative purposes and general information only. It does not constitute financial advice nor does it take into account your investment objectives, financial situation or particular needs. Commission, interest, platform fees, dividends, variation margin and other fees and charges may apply to financial products or services available from FP Markets. The information in this website has been prepared without taking into account your personal objectives, financial situation or needs. You should consider the information in light of your objectives, financial situation and needs before making any decision about whether to acquire or dispose of any financial product. Contracts for Difference (CFDs) are derivatives and can be risky; losses can exceed your initial payment and you must be able to meet all margin calls as soon as they are made. When trading CFDs you do not own or have any rights to the CFDs underlying assets.

FP Markets recommends that you seek independent advice from an appropriately qualified person before deciding to invest in or dispose of a derivative. A Product Disclosure Statement for each of the financial products available from FP Markets can be obtained either from this website or on request from our offices and should be considered before entering into transactions with us. First Prudential Markets Pty Ltd (ABN 16 112 600 281, AFS Licence No. 286354).FP Markets does not accept applications from U.S, Japan or New Zealand residents or residents from any other country or jurisdiction where such distribution or use would be contrary to those local laws or regulations.